Activity-Based Costing and Benchmarking: A Tandem for Quality-Oriented Governments

Article excerpt

Over the past decade, the globalization of the economy has put pressure on governments around the world to adopt new practices and approaches. Commonly called "New Public Management," the new practices and approaches are characterized as emphasizing productivity and performance measurement; competition between the public and private sectors for the provision of services-often called competitive tendering or marketization; customer service; decentralization of decision-making and authority; and the adoption of private sector-style management practices. In a 2000 article, I discussed the linkage between Activity-Based Costing (ABC), performance measurement and statistical process control techniques. This article completes the circle, in that it discusses the relationship between ABC and benchmarking.

There are two reasons for this article. First, ABC and benchmarking are two interrelated tools that are used successfully by Quality Award-winning governments around the world. Yet, a recent international study shows that the adoption of ABC and benchmarking is hindered by a lack of knowledge about these techniques. This article takes a small step toward filling the knowledge gap, by providing a general discussion of the impetus for adoption, the tools, their interrelationship and the success governments around the world are having applying these tools. Second, neither the tools, nor government as a practical matter, operate in a vacuum. Thus, understanding the relationships between the tools and how governments around the world are successfully using them to meet multifaceted challenges can facilitate adoption and their successful use.

Impetus For Adoption

ABC is slowly becoming the dominant cost accounting method. This is because ABC is believed to provide better cost accounting information than traditional methods. Most cost accounting textbooks now devote considerable space to the structure and techniques associated with ABC. Quality and cost of quality-related questions are part of the Certificate of Management Accounting examination. Across the economic spectrum, organizations that have adopted ABC include: Texas Instruments, AT&T, American Express, Fireman's Fund, Alexandria Hospital, Hewlett Packard, GM, Weyerhaeuser, Amtrak and Union Pacific. In Australia, ABC is the dominant cost accounting method used by Quality Award-winning local governments. In the United States, a number of state and local governments are using ABC. Among them are the Virginia State Retirement System, a 1999 Virginia U.S. Senate Productivity and Quality Award (VASPQA) winner; Chesterfield County, VA, a 1994 and 1998 VASPQA winner, and the cities of Phoenix, AZ, Indianapolis, IN, Charlotte, NC and Houston, TX. At the federal level, the U.S. military is using ABC.

In the public sector there are two additional reasons for ABC's adoption. First, benchmarking requires metrics that are compatible with those used by the private sector. ABC provides these types of metrics. Second, in some instances, local governments are using a wide variety of performance measures, not the least of which are cost and efficiency measures. Accurate cost information is needed to measure improvement and ensure that comparative placement is correct.

In the United Kingdom, for instance, the Blair administration requires local governments to demonstrate that they are providing "best value." Two techniques that demonstrate "best value" are benchmarking and competitive tendering. As part of ensuring the maintenance of "best value," local governments are expected to demonstrate continuous improvement. Cost/efficiency and quality improvement is determined by reaching, over a five-year period, the levels of performance equivalent to that of the top 25 percent of local governments and by improving performance by 2 percent a year.

Benchmarking is mandated or encouraged by federal governments and quality award organizations. The 1993 Government Performance and Results Act requires that U. …